Should I donate appreciated stock or cash?

## Should You Donate Appreciated Stock or Cash?

Thinking of making a charitable donation? Most people reach for their checkbook or credit card, but that might be a costly mistake.

While cash is simple, donating stock you've held for a while can be a much smarter move. It’s a strategy that can dramatically increase your tax savings and, in turn, the size of your gift. In fact, according to Fidelity Charitable, donors who contribute appreciated assets give 2.4 times more than those who donate cash alone.

## The Tax Advantage of Donating Appreciated Stock

Here’s the secret sauce: a two-for-one tax benefit that cash donations just can't match.

When you donate stock you've owned for more than a year directly to a charity, you get a tax deduction for the stock's full market value. On top of that, you completely sidestep the capital gains tax you would have paid if you'd sold it. This is because the charity, as a tax-exempt organization, doesn't have to pay capital gains taxes when it sells the stock. You're essentially transferring the asset untaxed.

### Quantifying the Tax Benefits

Let's put some real numbers to this. Imagine a couple in the highest tax bracket (37% federal income tax and 20% long-term capital gains tax) wants to give $100,000 to their favorite cause.

- **Cash Donation**: They would get a tax break worth about $37,000 (37% of $100,000).
- **Appreciated Stock Donation** (bought for $50,000): Their tax savings could jump to $48,500. This is calculated as follows: $37,000 (income tax deduction) + $10,000 (capital gains tax savings on the $50,000 gain) + $1,500 (Net Investment Income Tax savings, assuming a 3.8% rate on the capital gain). That's an extra $11,500 in their pocket, just by choosing the right asset to donate.

This example highlights the power of avoiding capital gains taxes, especially for those in higher tax brackets.

### Maximize Your Giving with Strategic Approaches

Ready to get strategic? A few smart moves can make a big difference.

- **Donate High-Performing Stocks**: Look at your portfolio. That one stock that has absolutely soared? It's the perfect candidate for donation. After donating, you can even repurchase the shares to reset your cost basis, which could help with [tax-loss harvesting](/what-is-tax-loss-harvesting) down the road. This strategy, sometimes called "stepping up your basis," allows you to own the same stock again, but with a higher cost basis. If you later sell the repurchased stock, you'll pay less in capital gains taxes because the difference between the sale price and your new, higher cost basis will be smaller. However, be mindful of the "wash sale" rule, which disallows a capital loss if you repurchase the same stock within 30 days before or after the sale. While this rule applies to claiming losses, some advisors suggest waiting at least 30 days after donating before repurchasing the stock to avoid any potential scrutiny.

- **Use Donor-Advised Funds (DAFs)**: A [Donor-Advised Fund](/donor-advised-funds-guide) acts like a charitable investment account. You can donate appreciated stock, get an immediate tax deduction of up to 30% of your adjusted gross income, and then decide which charities to support over time. DAFs offer flexibility. You can contribute now and decide on the specific charities later. This is particularly useful if you want to make a large donation in a high-income year but haven't yet finalized your charitable giving plans.

- **Align with Life Events**: Timing is everything. If you've had a high-income year from selling a business or getting a big bonus, donating appreciated assets can create a powerful deduction against that larger income. This can help offset the increased tax liability from the windfall. For example, if you sold a business and realized a significant capital gain, donating appreciated stock can help reduce your overall tax burden for that year.

## Real-World Scenarios

The savings are substantial even for smaller donations.

Let's say you own $50,000 worth of stock that you originally bought for $30,000. Donating it directly saves you an estimated $5,626 in federal taxes. This comes from avoiding $4,000 in capital gains tax (20% of $20,000 gain) and getting a $1,850 charitable deduction (37% of $50,000). This assumes a 20% long-term capital gains tax rate and a 37% federal income tax bracket.

That's over 11% more you can give to your cause, without spending a single extra dollar.

Consider another scenario: You have $10,000 worth of stock purchased for $2,000. By donating the stock instead of selling it and donating the cash, you avoid paying capital gains tax on the $8,000 gain. At a 15% capital gains tax rate, this saves you $1,200. Plus, you get a charitable deduction for the full $10,000, further reducing your taxable income.

## Important Considerations and Common Mistakes

This strategy isn't a free-for-all; there are a few rules to follow.

- **Holding Period**: To get the full tax benefit, you must have owned the stock for more than one year (long-term capital gains). If you've held the stock for less than a year (short-term capital gains), the deduction is limited to the lesser of the stock's fair market value or your cost basis.

- **Qualified Charities**: Your donation must go to a qualified non-profit organization as defined by the IRS (501(c)(3) organization). You can use the IRS's Tax Exempt Organization Search tool on their website to verify a charity's status. If your chosen charity isn't set up to accept stock, a Donor-Advised Fund is an excellent workaround.

- **AGI Limitations**: Your deduction for appreciated stock is generally limited to 30% of your adjusted gross income (AGI). Cash donations, on the other hand, are typically limited to 60% of your AGI. Don't worry if you go over; you can carry forward any unused deduction for up to five years. This means you can deduct the excess amount in future tax years, subject to the same AGI limitations.

### Common Mistakes to Avoid

*   **Donating Stock Held for Less Than a Year:** As mentioned above, you won't get the maximum tax benefit.
*   **Donating to a Non-Qualified Charity:** Always verify the charity's status with the IRS.
*   **Failing to Get an Appraisal:** For donations of stock worth more than $5,000, you'll need a qualified appraisal to substantiate the deduction.
*   **Not Keeping Proper Records:** Keep all documentation related to the donation, including brokerage statements and acknowledgment letters from the charity.

### When Cash Donations Make More Sense

What about stocks that are in the red? This is where the strategy flips.

If you have a stock that's worth less than you paid for it, sell it first. You can then donate the cash and claim the charitable deduction. This also allows you to take the capital loss on your taxes, which can offset other gains or up to $3,000 of your regular income. For example, if you bought a stock for $10,000 and it's now worth $6,000, sell it for a $4,000 loss. You can use this loss to offset $4,000 in capital gains or $3,000 of ordinary income, with the remaining $1,000 carried forward to future years. Then, donate the $6,000 in cash and claim a charitable deduction.

## The Smartest Way to Give

For anyone who itemizes deductions and owns stocks that have grown in value, donating those shares directly is almost always the better financial choice. You give more, and you save more. It's a win-win.

Of course, every financial situation is unique. It's always a good idea to chat with your tax advisor to find the perfect strategy for you and ensure your generosity has the greatest possible impact. A financial advisor can help you assess your portfolio, understand your tax situation, and develop a personalized giving strategy that aligns with your financial goals.

## Key Takeaways

*   **Donating appreciated stock offers a double tax benefit:** You avoid capital gains taxes and receive a charitable deduction.
*   **Consider a Donor-Advised Fund (DAF):** DAFs provide flexibility and can simplify charitable giving.
*   **Time your donations strategically:** Align donations with high-income years to maximize tax benefits.
*   **Don't donate losing stocks:** Sell them first to claim a capital loss.
*   **Consult a tax advisor:** Get personalized advice to optimize your giving strategy.